Edited version of private ruling

Authorisation Number: 1011659474568

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Ruling

Subject: Non-commercial losses, interest and travel expenses

1. Are you entitled to claim a deduction for interest expenses, on borrowed funds used to purchase a share in a project (the Project) which is the subject of a product ruling where the expenses are, incurred after the Project ceases due to insolvency?

Yes.

2. Will the non-commercial loss provisions of the taxation legislation limit your ability to offset the interest expenses for the year ended 30 June 2010 against your income from working?

No.

3. Will the non-commercial loss provisions of the taxation legislation apply to limit the deductibility of interest after the Project has ceased?

No.

4. Are you entitled to a deduction for the expenses incurred in travelling to attend the insolvency court proceedings and view the plantations?

No.

This ruling applies for the following periods

1 July 2009 to 30 June 2010

1 July 2010 to 30 June 2011

1 July 2011 to 30 June 2012

The scheme commenced on

1 July 2009

Relevant facts and circumstances

You purchased a share in the Project which was subject to a product ruling.

You borrowed funds to purchase the share and incur interest expenses in relation to the funds. There was no other use of the loan funds.

Entity A was the manager of the Project.

Entity A and its associated companies entered voluntary administration on during the year ended 30 June 2009.

A receiver and manager was appointed to operate the Project. The project continued to operate as per the product ruling.

During the year ended 30 June 2010, Entity A and its associated companies were placed into liquidation. Operation of the Project ceased on this date.

In the year ended 30 June 2010, you incurred travel expenses to attend court proceedings to determine the viability of the project, to inspect the plantations and to better understand the arrangements being put in place. The purpose of the visit was solely related to the plantations and there was no private component of your trip.

You continue to incur interest expenses on the loan. You do not have the capacity to pay out the loan at this stage.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1

Income Tax Assessment Act 1997 Section 35-55

Reasons for decision

Summary

You are entitled to claim a deduction for interest expenses incurred after the cessation of the Project. The non-commercial loss provisions of the taxation legislation do not affect your deduction for losses incurred prior to the Project entering into insolvency.

The non-commercial loss provisions of the taxation legislation do not apply to the interest expenses incurred after the Project ceased as it is considered that you were no longer carrying on a business in relation to the Project. You are still able to claim a deduction for the on-going interest expenses whilst you are not in a position to repay the loan.

Your travel expenses to attend a court hearing and visit the plantations are not deductible as they did not relate to the earning of assessable income.

Detailed reasoning

Carrying on a business

Section 995-1 of the Income Tax Assessment Act 1997 (ITAA 1997) defines a business as including any profession, trade, employment, vocation or calling but not occupation as an employee.

The time at which a business ends is a question of fact. A person does not necessarily cease to carry on a business merely because of an intention or resolution to that effect.

The issue will be determined by examination of the taxpayer's actions and the time trading actually ceases. In general, expenses incurred after ceasing business operations are not deductible, as they are not incurred in the course of carrying on a business.

You have invested in the Project which was managed by Entity A.

The relevant product ruling states that an investor in the Project is considered to be carrying on a business.

When Entity A entered voluntary administration, a receiver and manager was appointed to oversee the Project. They continued to operate the Project in the manner described by the product ruling.

When Entity A and associated entities were placed into liquidation the receiver and manager ceased managing the Project.

As no one was managing the Project in accordance with the product ruling, it is considered that the Project also ceased when Entity A entered liquidation.

Your activity is considered to have ceased when the Project ceased, that is, at the time Entity A entered liquidation.

Non commercial losses

Division 35 of the ITAA 1997 applies to losses from certain business activities for the year ended 30 June 2001 and subsequent years. The provisions only apply to individuals who conduct a business activity as:

· a partner in a partnership that made a loss, or their net partnership distribution after deducting any eligible expenses resulted in a loss, or

· a sole trader (including an individual in a general law partnership) and made a loss.

If you are in business (for tax purposes) you can only offset the loss from a business activity against your income from other sources if you pass one of four tests, an exception applies to you or the Commissioner exercises his discretion in your favour.

In the relevant product ruling, the Commissioner has granted his discretion for participants in the Project to claim losses up to and including the year ended 30 June 2011. This was on the proviso that the Project be carried out as per the arrangement described in the ruling.

Taxation Determination TD 2010/7 examines the situation where there is a change in the responsible entity of a registered agricultural managed investment scheme (MIS) and the arrangement continues to be implemented in accordance with the relevant product ruling. In this situation, there is no affect on the tax outcomes for the participants in the agricultural MIS.

Thus, when the operation of the Project was taken over by the receiver and manager, PR 2005/117 still applied. That is, you were still considered to be carrying on a business whilst the receiver and manger controlled the Project and the Commissioner's discretion remained in place.

The Commissioner's discretion ceased when the arrangement was no longer in place, that is, when Entity A entered.

Any losses, relating to your activity, which were incurred between 1 July 2009 and the date Entity A entered into liquidation, can be offset against your other income as the Commissioner's discretion remained effective for this period.

Interest expenses after cessation of project

Section 8-1 of the ITAA 1997 allows a deduction for all losses and outgoings to the extent to which they are incurred in gaining or producing assessable income except where the outgoings are of a capital, private or domestic nature, or relate to the earning of exempt income.

Taxation Ruling TR 2004/4 provides the Commissioner's view on the deductibility of interest where the income-producing asset has been disposed of and the taxpayer is still liable for the balance of the loan.

In general, the interest expense will continue to be deductible where it can be show that it relates to an income-producing asset which has been disposed of and the taxpayer is unable to avoid incurring ongoing interest liabilities.

In this situation, a nexus will continue to exist between the interest outgoings and the relevant income earning activities at least until the end of the period during which the interest cannot be avoided.

No deduction will be allowed for the interest expense incurred in situations where the taxpayer has the means and ability to repay the loan but chooses not to.

You borrowed funds to purchase a share in the Project. The share is considered to be an income-producing asset. You are unable to pay out the loan now that the Project has ceased.

As the ongoing interest expense relates to an income-producing asset and you are unable to avoid the interest expense, you are entitled to a deduction for the interest expense on the funds borrowed to purchase the share. This deduction relates to the interest incurred after Entity A entered into liquidation.

As you were not carrying on a business after Entity A entered into liquidation, the non-commercial loss provisions do not apply to prevent you from claiming this expense.

Travel expenses

A deduction is allowable for travel expenses incurred in earning or producing assessable income.

You incurred travel expenses to attend Entity A's and their associated entities court proceedings and to inspect the plantations.

As the expenses were incurred after the Project, and your income-earning activities, ceased it is not considered that the travel expenses were incurred in earning or producing assessable income.

The reasoning relating to the continuing deductibility of the interest expense does not apply to the travel expenses as the continuing interest expense is unavoidable whilst it was your choice to attend the court proceedings. The travel expenses were avoidable.

No deduction will be allowed for the travel expenses as they do not relate to the earning of your assessable income.